Employment Settlement Agreements

It is increasingly common for employers to seek to agree mutual termination with employees through settlement agreements. This practice is particularly relevant for senior employees, whose roles and responsibilities often necessitate more complex considerations.

Advantages

The advantage for employers is that, in return for a payment to an employee, they have the security that they will not face an Employment Tribunal claim from the employee. For senior employees, leaving under a settlement agreement can provide a dignified and financially secure exit strategy.

Legal requirements

To avoid the exploitation of employees, the law requires that in order for a settlement agreement to be valid, the employee receives independent legal advice. Whilst there is no strict obligation, there is an expectation that the employer will make a fixed contribution towards the costs of the employee’s legal advice.

Issues to consider

When employees, especially senior ones, are asked to sign settlement agreements, common issues to consider are:

• The proposed termination date
  • Does it reflect the employee’s notice entitlement?
  • If it is too far into the future, it may impact on the tax status of the payment. This is because the payment may be seen as a payment for services provided during a long handover period, as opposed to an ex gratia payment relating only to the termination
• The timing of termination payments
  • The timescale for payment should suit both employer and employee
  • The timing may have an impact on the tax treatment of payments
• The impact of the agreement on an employee’s ability to find new employment
  • Employers will often seek to re-state existing restrictions, or to introduce new restrictions (for example, by naming certain competitors or clients in respect of whom it wishes to restrict the employee). On the other hand, senior employees sometimes seek to be released from post-termination restrictions, or to have the restrictions varied. As well as agreeing the position in relation to post-termination restrictions, the parties may also need advice on the impact of any new restrictions on the tax treatment of payments made under the agreement
  • Employers will often include some obligations on the employer to provide post-termination co-operation (for example, in relation to future audits or investigations). Employees will want to ensure that such obligations are not too onerous
• The value of the claims being waived by the employee
  • This will be different from employee to employee as their potential claims will be different, as will the compensation they might be awarded, which in most cases will depend on how quickly they are likely to find another job
  • Common exceptions to the claims being waived by employees are:
    • Accrued pension rights
    • Claims for personal injury of which the employee is unaware when signing the agreement
    • Claims to enforce the settlement agreement itself
• Reputational issues
  • Parties normally agree that the fact and terms of the agreement will be kept confidential but an employee may want an exception to enable them to answer questions honestly in an interview as to why they left their employer
  • Employees may want to seek to agree the terms of an agreed reference or announcement to colleagues
  • Parties may want to prevent each other from making derogatory statements in the future and commonly seek to ensure that comments on social media are overed by such provisions
  • There is an increased debate about the use of “gagging clauses” that can impact the confidentiality terms, particularly in certain sectors
• Continuing benefits
  • Employees sometimes seek to negotiate to continue receiving some benefits after termination, especially where there is no or little cost to an employer. This might relate to issues such as medical or life insurance, or the provision of a company car. Employers will want to ensure there are clear parameters around the provision of these benefits. For example, where an employee is permitted to retain a company car for a certain period, it is important to clarify the insurance position and the employer will also want to ensure that the car is returned in a good condition
  • Some employees ask to retain laptops, or mobile phone handsets or a transfer of their phone number to a personal account. It is important that settlement agreement provisions cover all of the necessary details. This will often include a requirement for the employee to wipe any business-related information from such devices and often to permit the employer access to the device to ensure that this has been done
• Bonuses, LTIPS, and share plans
  • Employees who have more complex remuneration structures that might include LTIPs or share plans will want to ensure that their termination provisions are a fair reflection of their entitlements
• Reaffirmation agreements
  • Some settlement agreements are entered into months in advance of termination and require an employee to re-sign the agreement, or enter into a reaffirmation agreement on the actual termination date. Employers and employees need to ensure that the terms of any such agreements are clear and do not have any unintended consequences

We are a team of specialist employment lawyers who are experienced in acting on both sides of the fence on settlement agreements, providing tailored advice to both employers and senior employees.